form10-q.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM 10-Q
 
(Mark One)

x
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2008

OR

o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ___________ to ______________.

Commission File Number 1-32955

HOUSTON AMERICAN ENERGY CORP.
(Exact name of registrant as specified in its charter)

Delaware
  
76-0675953
(State or other jurisdiction of incorporation or organization)
  
(IRS Employer Identification No.)

801 Travis Street, Suite 1425, Houston, Texas 77002
(Address of principal executive offices)(Zip Code)

(713) 222-6966
(Registrant's telephone number, including area code)


(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.          Yes  x No  ¨
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer    o
Accelerated filer                       o
Non-accelerated filer      o
Smaller reporting company     x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  ¨ No  x

As of November 12, 2008, we had 28,100,772 shares of $.001 par value Common Stock outstanding.
 
 
 

HOUSTON AMERICAN ENERGY CORP.

FORM 10-Q
 
INDEX

       
Page No.
PART I.            FINANCIAL INFORMATION
    
         
       
         
     
3
         
     
4
         
     
5
         
     
6
         
     
11
         
     
17
         
     
17
         
PART II            OTHER INFORMATION
    
         
     
18
         
     
18


PART I - FINANCIAL INFORMATION
 
Financial Statements
 
HOUSTON AMERICAN ENERGY CORP.
BALANCE SHEET
(Unaudited)
 
   
September 30, 2008
    
December 31, 2007
  
             
ASSETS
CURRENT ASSETS:
            
Cash
  
$
11,853,248
    
$
417,818
  
Marketable securities
    
—
      
9,650,000
  
Accounts receivable
    
760,956
      
577,512
  
Prepaid expenses
    
50,698
      
49,255
  
Other current assets
    
1,691,551
      
—
  
Total current assets
    
14,356,453
      
10,694,585
  
                 
PROPERTY, PLANT AND EQUIPMENT
                
Oil and gas properties – full cost method
                
Costs subject to amortization
    
14,621,954
      
12,714,669
  
Costs not being amortized
    
1,280,298
      
998,806
  
Office equipment
    
11,878
      
11,878
  
Total property, plant and equipment
    
15,914,130
      
13,725,353
  
Accumulated depreciation and depletion
    
(3,838,998
)
    
(3,708,308
)
Total property, plant and equipment, net
    
12,075,132
      
10,017,045
  
                 
OTHER ASSETS
    
101,453
      
3,167
  
Total Assets
  
$
26,533,038
    
$
20,714,797
  
                 
LIABILITIES AND SHAREHOLDERS’ EQUITY
                 
CURRENT LIABILITIES:
                
Accounts payable
  
$
603,120
    
$
260,222
  
Accrued expenses
    
798
      
1,720
  
Foreign income taxes payable
    
22,489
      
74,141
  
Total current liabilities
    
626,407
      
336,083
  
                 
LONG-TERM LIABILITIES:
                
Reserve for plugging costs
    
126,212
      
115,061
  
Deferred rent obligation
    
20,009
      
20,206
  
Total long-term liabilities
    
146,221
      
135,267
  
                 
SHAREHOLDERS’ EQUITY:
                
Common stock, $0.001 par value; 100,000,000 shares authorized; 28,100,772 and 27,920,172 shares outstanding, respectively
    
28,100
      
27,920
  
Additional paid-in capital
    
23,586,273
      
22,377,831
  
Treasury stock, at cost; 100,000 shares
    
(85,834
)
    
(85,834
)
Retained earnings (accumulated deficit)
    
2,231,871
      
(2,076,470
)
Total shareholders’ equity
    
25,760,410
      
20,243,447
  
Total liabilities and shareholders’ equity
  
$
26,533,038
    
$
20,714,797
  

The accompanying notes are an integral part of these financial statements

3

HOUSTON AMERICAN ENERGY CORP.
STATEMENTS OF OPERATIONS
(Unaudited)

   
Nine Months Ended
September 30,
    
Three Months Ended
September 30,
  
   
2008
    
2007
    
2008
    
2007
  
Revenue:
                        
Oil and gas
   $ 8,616,868     $ 3,153,914     $ 2,350,782     $ 1,168,829  
Total revenue
     8,616,868       3,153,914       2,350,782       1,168,829  
                                 
Expenses of operations:
                                
Lease operating expense and severance tax
     2,789,630       1,419,442       747,740       524,630  
Joint venture expenses
     144,919       99,291       43,225       20,237  
General and administrative expense
     2,616,714       1,285,533       609,398       410,752  
Depreciation and depletion
     913,214       1,115,877       147,311       449,120  
Gain on sale of oil and gas properties
     (7,615,236 )     —       —       —  
Total operating expenses
     (1,150,759 )     3,920,143       1,547,674       1,404,739  
                                 
Income (loss) from operations
     9,767,627       (766,229 )     803,108       (235,910 )
                                 
Other income:
                                
Interest income
     232,870       504,763       72,427       144,209  
Total other income
     232,870       504,763       72,427       144,209  
                                 
Net income (loss) before taxes
     10,000,497       (261,466 )     875,535       (91,701 )
                                 
Income tax expense (benefit)
     5,130,141       (99,443 )      76,703       (366,891 ) 
                                 
Net income (loss)
   $ 4,870,356     $ (162,023 )   $ 798,832     $ 275,190  
                                 
Basic income (loss) per share
   $ 0.17     $ (0.01 )   $ 0.03     $ 0.01  
                                 
Diluted income (loss) per share
   $ 0.17     $ (0.01 )   $ 0.03     $ 0.01  
                                 
Basic weighted average shares
     28,003,915       27,920,172       28,100,772       27,920,172  
                                 
Diluted weighted average shares
     28,165,640       27,920,172       28,309,632       28,021,482  


The accompanying notes are an integral part of these financial statements

4

HOUSTON AMERICAN ENERGY CORP.
STATEMENTS OF CASH FLOWS
(Unaudited)

   
For the Nine Months Ended September 30,
  
   
2008
    
2007
  
             
CASH FLOWS FROM OPERATING ACTIVITIES
            
Net income (loss)
  
$
4,870,356
    
$
(162,023
)
Adjustments to reconcile net income (loss) to net cash from operations:
                
Depreciation and depletion
    
913,214
      
1,115,877
  
Stock based compensation
    
833,623
      
294,042
  
Accretion expense – asset retirement obligation
    
15,546
      
1,881
  
Amortization of deferred rent
    
(198
) 
    
—
  
Gain on sale of oil and gas properties
    
(7,615,236
)
    
—
  
Changes in operating assets and liabilities:
                
(Increase) decrease in accounts receivable
    
(172,109
)
    
34,601
  
(Increase) decrease in prepaid expense
    
(30,767
)
    
(59,074
)
Increase in accounts payable and accrued liabilities
    
290,323
      
(175,469
) 
                 
Net cash provided by (used in) operations
    
(895,248
)
    
1,049,835
  
                 
CASH FLOWS FROM INVESTING ACTIVITIES
                
Sale of marketable securities
    
9,650,000
      
4,150,000
  
Acquisition of oil and gas properties
    
(7,180,675
)
    
(4,660,318
)
Proceeds from sale of oil and gas properties, net of expenses
    
10,146,655
      
—
  
Increase in other assets
    
(98,287
)
    
—
  
                 
Net cash provided by (used in) investing activities
    
12,517,693
      
(510,318
)
                 
CASH FLOWS FROM FINANCING ACTIVITIES
                
Dividends paid
    
(562,015
)
    
—
  
Exercise of warrants
    
375,000
      
—
  
                 
Net cash used in financing activities
    
(187,015
) 
    
—
  
                 
Increase in cash and equivalents
    
11,435,430
      
539,517
  
Cash, beginning of period
    
417,818
      
409,008
  
Cash, end of period
  
$
11,853,248
    
$
948,525
  
                 
SUPPLEMENTAL CASH FLOW INFORMATION:
                
Interest paid
  
$
—
    
$
—
  
Taxes paid
  
$
5,107,652
    
$
—
  
                 
NONCASH INVESTING AND FINANCING INFORMATION
                
Cash proceeds from sale of oil and gas properties escrowed
  
$
1,673,551
    
$
—
  


The accompanying notes are an integral part of these financial statements

5

HOUSTON AMERICAN ENERGY CORP.
Notes to Financial Statements
September 30, 2008
(Unaudited)

NOTE 1. – BASIS OF PRESENTATION
 
The accompanying unaudited financial statements of Houston American Energy Corp., a Delaware corporation (the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q.  They do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for a complete financial presentation. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, considered necessary for a fair presentation, have been included in the accompanying unaudited financial statements.  Operating results for the periods presented are not necessarily indicative of the results that may be expected for the full year.
 
These financial statements should be read in conjunction with the financial statements and footnotes, which are included as part of the Company’s Form 10-K for the year ended December 31, 2007.
 
NOTE 2. – CHANGES IN PRESENTATION
 
Certain financial presentations for the periods presented for 2007 have been reclassified to conform to the 2008 presentation.
 
NOTE 3. – RECENT ACCOUNTING PRONOUNCEMENTS
 
In September 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 157 “Fair Value Measurements”, which provides expanded guidance for using fair value to measure assets and liabilities. SFAS 157 establishes a hierarchy for data used to value assets and liabilities, and requires additional disclosures about the extent to which a company measures assets and liabilities at fair value, the information used to measure fair value, and the effect of fair value measurements on earnings. Implementation of SFAS 157 is required on January 1, 2008. The adoption of SFAS 157 did not have a material impact on the Company’s results of operations or financial position.

In December 2007, the FASB issued SFAS No. 141R, “Business Combinations,” which revises SFAS No. 141 and changes multiple aspects of the accounting for business combinations. SFAS No. 141R requires the acquirer to recognize most identifiable assets acquired, liabilities assumed, and noncontrolling interests in the acquiree at their full fair value on the acquisition date. Goodwill is to be recognized as the excess of the consideration transferred plus the fair value of the noncontrolling interest over the fair values of the identifiable net assets acquired. Subsequent changes in the fair value of contingent consideration classified as a liability are to be recognized in earnings, while contingent consideration classified as equity is not to be remeasured. Costs such as transaction costs are to be excluded from acquisition accounting, generally leading to recognizing expense and additionally, restructuring costs that do not meet certain criteria at acquisition date are to be subsequently recognized as post-acquisition costs. SFAS No. 141R is effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The Company is currently evaluating the impact that this issuance will have on its financial position and results of operations.

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities—an amendment of FASB Statement No. 133”.  SFAS 161 requires entities that utilize derivative instruments to provide qualitative disclosures about their objectives and strategies for using such instruments, as well as any details of credit-risk-related contingent features contained within derivatives.  SFAS 161 also requires entities to disclose additional information about the amounts and location of derivatives located within the financial statements, how the provisions of SFAS 133 has been applied, and the impact that hedges have on an entity’s financial position, financial performance, and cash flows.  SFAS 161 is effective for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged.  The Company currently does not anticipate the adoption of SFAS 161 will have a material impact on the disclosures already provided.

6

In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles”, which identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles (GAAP) in the United States of America (the GAAP hierarchy).  This Statement is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, “The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles”.  The Company does not expect the adoption of SFAS 162 to have a material effect on its financial statements or related disclosures.

In June 2008, the FASB issued FSP EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities” (“FSP EITF 03-6-1”). FSP EITF 03-6-1 addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting and, therefore, need to be included in computing earnings per share under the two-class method described in SFAS No. 128, “Earnings Per Share.” FSP EITF 03-6-1 is effective for the Company as of January 1, 2009 and in accordance with its requirements it will be applied retrospectively. The Company does not expect the adoption of FSP EITF 03-6-1 to have a material impact on its consolidated financial statements.

NOTE 4. – MARKETABLE SECURITIES
 
During the nine months ended September 30, 2008, the Company held marketable securities, which consisted of investments in corporate and municipal bonds. At September 30, 2008, the Company held no marketable securities.  The Company accounted for its investments in marketable securities pursuant to SFAS No. 115 "Accounting for Certain Investments in Debt and Equity Securities", and classified all of its marketable securities as available-for-sale. Accordingly, the investments were carried at fair market value with unrealized gains and losses, net of tax, reported as a separate component of stockholders equity. Realized gains and losses and declines in value determined to be other then temporary in nature were included in interest income, net. There were no unrealized gains or losses associated with these marketable securities at December 31, 2007 as the cost approximated fair market value. There were no realized gains or losses during the three month or nine month periods ending September 30, 2008.

NOTE 5. – STOCK-BASED COMPENSATION EXPENSE

On January 1, 2006, the Company adopted Statement of Financial Accounting Standards 123R, “Share-Based Payments”, or SFAS 123R. The Company periodically grants options to employees, directors and consultants under the Company’s 2005 Stock Option Plan and the Company’s 2008 Equity Incentive Plan. These are accounted for in accordance with the provisions of SFAS 123R and Emerging Issues Task Force Abstract No. 96-18, “Accounting for Equity Instruments That are Issued to Other Than Employees for Acquiring or in Conjunction with Selling, Goods or Services” as well as other authoritative accounting pronouncements. The Company is required to make estimates of the fair value of the related instruments and recognize expense over the period benefited, usually the vesting period.

7

Stock Option and Warrant Activity

A summary of stock option activity and related information for the nine months ended September 30, 2008 is presented below:

   
Options
    
Weighted-Average Exercise Price
    
Aggregate Intrinsic Value
  
                   
Outstanding at January 1, 2008
    
339,000
    
$
3.12
    
$1,085,280
  
Granted
    
1,053,333
    
$
7.20
    
—
  
Exercised
    
—
      
—
    
—
  
Forfeited
    
—
      
—
    
—
  
Outstanding at September 30, 2008
    
1,392,333
    
$
6.21
    
$
1,085,280
  
Exercisable at September 30, 2008
    
339,000
    
$
3.12
    
$
1,085,280
  

On June 2, 2008, the Company granted to the Company’s two principal officers a total of 1,050,000 options to purchase shares of the Company’s common stock.  The exercise price is $7.20 per share.  The options have a term of ten years and 900,000 of the options vest over six years and 150,000 of the options vest over three years.

Also on June 2, 2008, the Company granted to a director 3,333 options to purchase shares of the Company’s common stock.  The options vest immediately, have an exercise price of $7.20 per share and a term of ten years.

The above options were valued at a total of $5,314,327 using the Black-Scholes option-pricing model and the following parameters:  (1) 3.88% risk-free discount rate, (2) expected volatility of 73.82%, (3) zero expected dividends, and (4) an expected option life for each grant calculated pursuant to the terms of SAB 107 as the options granted qualify as ‘plain vanilla’ under that literature.

At September 30, 2008, the Company had remaining 190,000 warrants outstanding with a remaining contractual life of 2.57 years.  The weighted average exercise price for all remaining outstanding warrants was $3.00.  The warrants had an intrinsic value of $630,800 at September 30, 2008.

The closing price of the Company’s common stock on September 30, 2008 was $6.32.

Stock Grants

During the nine months ended September 30, 2008, the Company’s shareholders approved and the Company granted 55,600 shares of restricted common stock with immediate vesting to the Company’s two principal officers.  The Company recognized compensation expense of $400,320 based upon the stock price at the grant date attributable to these grants, which were originally approved, subject to stockholder approval, in 2007 by the Company’s Board of Directors and then later approved by the Company’s stockholders and issued in June 2008

Share-Based Compensation Expense

The following table reflects share-based compensation recorded by the Company for the nine months ended September 30, 2008 and 2007:

   
Nine Months Ended September 30,
  
   
2008
    
2007
  
             
Share-based compensation expense included in reported net income (loss)
  
$
833,626
    
$
294,042
  
Earnings per share effect of share-based compensation expense
  
$
(0.03
)
  
$
(0.01
)

8

The following table reflects share-based compensation recorded by the Company for the three months ended September 30, 2008 and 2007:

   
Three Months Ended September 30,
  
   
2008
    
2007
  
             
Share-based compensation expense included in reported net income (loss)
  
$
256,023
    
$
41,166
  
Earnings per share effect of share-based compensation expense
  
$
(0.01
)
  
$
(0.00
)

At September 30, 2008, total unrecognized stock-based compensation expense related to non-vested stock options and grants of restricted common stock was $4,966,116.

NOTE 6. – SALE OF OIL AND GAS PROPERTIES

Gain on Sale of Oil and Gas Properties

In June 2008, the Company, through Hupecol Caracara LLC as owner/operator under the Caracara Association Contract, sold all of its interest in the Caracara Association Contract and related assets for a total cash consideration of $11,917,418.  At December 31, 2007, the estimated proved reserves associated with these assets totaled 755,474 barrels of oil, which represented 37.89% of our estimated proved oil and natural gas reserves.  Sales of oil and gas properties under the full cost method of accounting are accounted for as adjustments of capitalized costs with no gain or loss recognized, unless the adjustment significantly alters the relationship between capitalized costs and reserves.  Since the sale of these oil and gas properties would significantly alter the relationship, we recognized a gain on the sale of $7,615,236 computed as follows:

Proceeds from the sale
  
$
11,917,418
  
Add: Transfer of asset retirement and other obligations
    
46,633
  
Less: Transaction costs
    
(370,908
)
Carrying value of oil and gas properties
    
(3,977,907
)
Carrying value of other assets
    
-
  
Net gain on sale
  
$
7,615,236
  

The carrying value of the properties sold was computed by allocating total capitalized costs within the non-U.S. full cost pool between properties sold and properties retained based upon the ratio of proved reserves sold and those proved reserves retained to total estimated proved reserves prior to the sale.

The following is a reconciliation of 2008 year-to-date activity in our non-U.S. full cost center:

   
Evaluated
    
Unevaluated
  
Oil and gas properties -
            
Balance beginning of year
  
$
9,289,675
    
$
13,330
  
Costs incurred year-to-date
    
6,649,371
      
74,784
  
Sale of Caracara properties
    
(4,760,441
)
    
-
  
Balance, September 30, 2008
  
$
11,178,605
    
$
88,114
  

Accumulated depreciation, depletion and amortization -
      
Balance beginning of year
  
$
(1,468,827
)
Provision for DD&A
    
(656,337
)
Sale of Caracara properties
    
782,534
  
Balance, September 30, 2008
    
(1,342,630
)
Net capitalized costs
  
$
9,924,089
  


9

The following table presents pro forma data that reflects revenue, income from continuing operations, net income and income per share for the three and nine months ended September 30, 2008 and September 30, 2007 as if the Caracara transaction had occurred at the beginning of the periods.

Pro-Forma Information
  
Three Months Ended September 30,
    
Nine Months Ended September 30,
  
   
2008
    
2007
    
2008
    
2007
  
                         
Oil and gas revenue
  
$
2,350,782
    
$
376,300
    
$
5,612,003
    
$
991,740
  
Income from operations
    
824,561
      
(639,229
)
    
(70,203
)
    
(1,757,219
)
Net income (loss)
  
$
820,285
    
$
191,625
    
$
(24,459
)
  
$
(568,042
)
                                 
Basic income (loss) per share
  
$
.03
    
$
.01
    
$
(0.00
)
  
$
(0.02
)
Diluted Income (loss) per share
  
$
.03
    
$
.01
    
$
(0.00
)
  
$
(0.02
)

Other Current Assets

Pursuant to the terms of the sale of the Caracara assets, on the closing date of the sale, a portion of the purchase price was deposited in escrow to settle post-closing adjustments under the purchase and sale agreement.  The funds deposited in escrow will be released to the Company, or to the purchaser, based on post-closing adjustments 12 months following closing.  The Company’s proportionate interest in the escrow deposit, totaling $1,673,551, has been recorded as Other Current Assets.

The net proceeds and the gain realized from the sale of the Caracara assets may be adjusted based on post-closing adjustments.

Colombian Taxes

Colombian taxes attributable to the sale of the Caracara assets, totaling $4,394,575, were recorded and paid at the time of closing.

NOTE 7. – EXECUTIVE COMPENSATION

During the nine months ended September 30, 2008, the Company recognized compensation expense, in addition to salaries, to its two executive officers consisting of (1) $400,320 attributable to grants of 55,600 shares of restricted stock discussed above in Note 5, (2) payment of cash bonuses totaling $750,000, which bonuses were contingent on the completion of the sale of the Caracara assets and were paid in June 2008, and (3) $433,303 attributable to grants of stock options.

NOTE 8. – ISSUANCES OF COMMON STOCK

During the nine months ended September 30, 2008, the Company issued 125,000 shares of common stock for $375,000 to a single investor pursuant to the exercise of an outstanding warrant.

The shares were offered and sold in a private transaction pursuant to the exemption from registration provided by Section 4(2) of the Securities Act of 1933.  The investor was an "accredited investor" as defined in Rule 501 promulgated under the Securities Act.

NOTE 9. – DIVIDEND

During the quarter ended September 30, 2008, we declared and paid cash dividends to our shareholders of $0.02 per share, or an aggregate of $562,015.

10

NOTE 10. - GEOGRAPHICAL INFORMATION
 
The Company currently has operations in two geographical areas, the United States and Colombia. Revenues for the nine months ended September 30, 2008 and Long Lived Assets as of September 30, 2008 attributable to each geographical area are presented below:
 
   
Nine Months Ended September 30, 2008
  
   
Revenues
    
Long Lived Assets, Net
  
             
United States
  
$
410,268
    
$
2,151,043
  
Colombia
    
8,206,600
      
9,924,089
  
Total
  
$
8,616,868
      
12,075,132
  


MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Information

This Form 10-Q quarterly report of Houston American Energy Corp. (the “Company”) for the quarter and nine months ended September 30, 2008, contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which are intended to be covered by the safe harbors created thereby.  To the extent that there are statements that are not recitations of historical fact, such statements constitute forward-looking statements that, by definition, involve risks and uncertainties.  In any forward-looking statement, where the Company expresses an expectation or belief as to future results or events, such expectation or belief is expressed in good faith and believed to have a reasonable basis, but there can be no assurance that the statement of expectation or belief will be achieved or accomplished.
 
The actual results or events may differ materially from those anticipated and as reflected in forward-looking statements included herein.  Factors that may cause actual results or events to differ from those anticipated in the forward-looking statements included herein include the Risk Factors described in Item 1A of this report and of the Company’s Form 10-K for the year ended December 31, 2007.
 
Readers are cautioned not to place undue reliance on the forward-looking statements contained herein, which speak only as of the date hereof.  The Company believes the information contained in this Form 10-Q to be accurate as of the date hereof.  Changes may occur after that date, and the Company will not update that information except as required by law in the normal course of its public disclosure practices.
 
Additionally, the following discussion regarding the Company’s financial condition and results of operations should be read in conjunction with the financial statements and related notes contained in Item 1 of Part 1 of this Form 10-Q, as well as the Risk Factors in Item 1A and the financial statements in the Company’s Form 10-K for the fiscal year ended December 31, 2007.
 
Critical Accounting Policies

The Company’s discussion and analysis of its financial condition and results of operations are based upon the Company’s financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America.  The Company believes certain critical accounting policies affect its more significant judgments and estimates used in the preparation of its financial statements.  A description of the Company’s critical accounting policies is set forth in the Company’s Form 10-K for the year ended December 31, 2007.  As of, and for the nine months ended, September 30, 2008, there have been no material changes or updates to the Company’s critical accounting policies other than the following updated information relating to Unevaluated Oil and Gas Properties:

11

-- Unevaluated Oil and Gas Properties.  Unevaluated oil and gas properties not subject to amortization include the following at September 30, 2008:

   
September 30, 2008
  
Acquisition costs
  
$
58,097
  
Evaluation costs
    
1,201,577
  
Retention costs
    
20,624
  
Total
  
$
1,280,298
  

The carrying value of unevaluated oil and gas prospects include $88,114 expended for properties in the South American country of Colombia at September 30, 2008.  We are maintaining our interest in these properties and development has or is anticipated to commence within the next twelve months.

Current Year Developments

Drilling Activity

During the nine months ended September 30, 2008, we drilled 12 international wells in Colombia, as follows:

▪
Ten wells were drilled on concessions in which we hold a 12.5% working interest; of which, at September 30, 2008, seven were in production, two were dry holes and one was awaiting completion.

▪
One well was drilled on a concession in which we hold a 6.25% working interest and was a dry hole.

▪
One well drilled on a concession in which we hold a 1.6% working interest, was sold as part of the Caracara transaction and was in production at the time of that sale.
 
During the nine months ended September 30, 2008, one domestic well, the Petro Hunt Wilberts A. Sons et.al. well, located in Louisiana on our North Bayou Henry lease, was drilled and was a dry hole.  The well drilled on our Caddo Lake prospect during the fourth quarter of 2007 was waiting on a pipeline connection and completion at September 30, 2008.  Subsequent to September 30, pipeline construction and connection to the well was completed and well completion operations began.

At September 30, 2008, we planned to drill two domestic wells on the Home Run and West Klondite prospects in Louisiana and eight additional international wells over the balance of 2008.

Sale of Caracara Assets

In June 2008, we, through Hupecol Caracara LLC as owner/operator under the Caracara Association Contract, sold all of our interest in the Caracara Association Contract and related assets.  As a result of the sale of the Caracara assets, we received net proceeds, after deduction of fees and expenses of the transaction, of $11,546,510, realized a gain on the sale of $7,615,236 and eliminated from oil and gas properties costs subject to amortization associated with the Caracara assets totaling $3,977,907.

Pursuant to the terms of the sale of the Caracara assets, on the closing date of the sale, a portion of the purchase price was deposited in escrow to settle post-closing adjustments under the purchase and sale agreement.  The funds deposited in escrow will be released to us, or to the purchaser, based on post-closing adjustments 12 months following closing.  Our proportionate interest in the escrow deposit, totaling $1,673,551, has been recorded as Other Current Assets.

The net proceeds and the gain realized from the sale of the Caracara assets may be adjusted based on post-closing adjustments.

Colombian taxes attributable to the sale of the Caracara assets, totaling $4,394,575, were recorded and paid at the time of closing.

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Production from the Caracara prospect accounted for $0 and $3,004,865 of our revenues during the quarter and nine months ended September 30, 2008.

Lease operating expense from the Caracara prospect accounted for $20,716 and $464,790 of our lease operating expense during the quarter and nine months ended September 30, 2008.

Leasehold Activity

During the nine months ended September 30, 2008, we acquired, through our 1.594674% interest in Hupecol Caracara LLC, an interest in the La Cuerva Contract covering approximately 75 square miles in Colombia.

During the nine months ended September 30, 2008, we acquired interests in two additional prospects in South Louisiana for which we advanced leasehold costs of approximately $7,770.  We sold our interest in one of the prospects – the North Henry Bayou prospect – during the nine month period, retaining a 4.5% carried interest in the prospect, for which we received $60,301 and sold our interest in the second prospect – the Home Run prospect – during the nine month period for which we received $213,395.

Seismic Activity

During the nine months ended September 30, 2008, our operator in Colombia acquired approximately 65 miles of additional seismic and geological data. The additional data relates primarily to prospects in which we hold a 12.5% working interest. Our share of the costs of such data acquisition was $309,061.  The operator also acquired additional seismic data on the La Cuerva prospect.  Our share of this cost was $41,030.

At September 30, 2008, we planned to shoot an additional 41 square miles combined of seismic on the Las Garzas and Leona contracts over the balance of 2008.

Executive Compensation – Restricted Stock, Stock Options and Bonus Payments

During the nine months ended September 30, 2008, the Company recognized compensation expense, in addition to salaries, to its two executive officers consisting of (1) $400,320 attributable to grants of 55,600 shares of restricted stock discussed above in Note 5, (2) payment of cash bonuses totaling $750,000, which bonuses were contingent on the completion of the sale of the Caracara assets and were paid in June 2008, and (3) $433,303 attributable to grants of stock options.

Dividend

During the quarter ended September 30, 2008, we declared and paid cash dividends to our shareholders of $0.02 per share, or an aggregate of $562,015.

Macroeconomic Impact on Oil and Natural Gas Prices

Late in the third quarter of 2008 and accelerating during the early fourth quarter of 2008, the United States and global economies suffered a severe disruption in credit and financial markets that have been accompanied by economic contraction and a sharp drop in the price of oil and natural gas due to a projected decline in demand for oil and natural gas.  We have not historically entered into hedging transactions to reduce our exposure to commodity price risks.  As a result of such macroeconomic conditions and our unhedged position, we anticipate the prices at which we sell oil and natural gas will decline markedly during the fourth quarter of 2008 and for the foreseeable future and that our total revenues and profitability will decline as well.

Results of Operations

Oil and Gas Revenues.  Total oil and gas revenues increased 101.1% to $2,350,782 in the quarter ended September 30, 2008 when compared to the quarter ended September 30, 2007. For the first nine months of 2008, oil and gas revenues increased 173.2%, to $8,616,868, when compared to the first nine months of 2007.

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The increase in oil and gas revenue for both the quarter and nine months over 2007 is principally due to increased production resulting from the development of the Colombian fields, particularly fields in which we hold a higher working interest (12.5%), and higher oil prices, partially offset by the sale of 34 producing wells as part of the Caracara transaction during the second quarter of 2008. During the third quarter of 2008, we had interests in 12 producing wells in Colombia and 7 producing wells in the U.S as compared to 31 producing wells in Colombia and 8 producing wells in the U.S. during the 2007 third quarter.

Oil and gas revenues from the Caracara prospect totaled $0 and $3,004,865 during the quarter and the nine months ended September 30, 2008, respectively, as compared to oil and gas revenues of $ 792,529 and $ 2,162,174 during the quarter and nine months ended September 30, 2007.

The following table sets forth a comparison of hydrocarbon prices for the quarter and nine month periods:

 
Quarter Ended September 30,
  
Nine Months Ended September 30,
  
Hydrocarbon prices:
2008
  
2007
  
2008
  
2007
  
                         
Oil – Average price per barrel
  
$
99.74
    
$
62.57
    
$
99.46
    
$
61.12
  
Gas – Average price per mcf
  
$
11.89
    
$
6.33
    
$
10.33
    
$
6.68
  

As noted above, we anticipate that our average prices realized from the sale of oil and gas will decline markedly in the fourth quarter of 2008.

The following table sets forth a comparison of oil and gas sales by region for the quarter and nine month periods.

   
Quarter Ended September 30,
    
Nine Months Ended September 30,
  
Sales:
  
2008
    
2007
    
2008
    
2007
  
                         
Oil
Colombia
  
$
2,191,499
    
$
896,463
    
$
8,206,600
    
$
2,751,117
  
 
US
    
52,678
      
40,979
      
146,153
      
102,777
  
 
Total – Oil
  
$
2,244,177
    
$
937,442
    
$
8,352,753
    
$
2,853,894
  
                                   
Gas
Colombia
  
$
-
    
$
-
    
$
-
    
$
-
  
 
US
    
106,605
      
231,387
      
264,115
      
300,020
  
 
Total – Gas
  
$
106,605
    
$
231,387
    
$
264,115
    
$
300,020
  

Natural Gas production was down in the third quarter of 2008 as compared to the third quarter of 2007 due to natural production declines related to our domestic wells.

Lease Operating Expenses. Lease operating expenses, excluding joint venture expenses relating to our Colombian operations discussed below, increased 42.5% to $747,740 in the 2008 quarter from $524,630 in the 2007 quarter.  For the nine months ended September 30, 2008, lease operating expenses, excluding joint venture expenses, increased 96.5%, to $2,789,630, compared to the 2007 six month period.

14

The increase in lease operating expenses was attributable to the increase in the number of wells operated during the 2008 period and increased activities on prospects in which we hold a higher working interest (12.5%) during 2008 as compared to 2007, partially offset by the elimination of lease operating expenses on the Caracara prospect following the sale of the prospect in June 2008.

   
Quarter Ended September 30,
    
Nine Months Ended September 30,
  
Lease Operating Expenses:
  
2008
    
2007
    
2008
    
2007
  
                         
Colombia
  
$
714,443
    
$
472,089
    
$
2,673,584
    
$
1,321,744
  
U.S.
    
33,297
      
52,541
      
116,046
      
97,698
  
Total
  
$
747,740
    
$
524,630
    
$
2,789,630
    
$
1,419,442
  


Joint Venture Expenses.  Our allocable share of joint venture expenses attributable to the Colombian Joint Venture totaled $43,225 during the 2008 quarter and $20,237 for the 2007 quarter. For the nine months ended September 30, 2008, joint venture expenses for Colombia totaled $144,919 as compared to $99,291 for the nine months ended September 30, 2007.  The increase in joint venture expenses was attributable to an increase in drilling activity in concessions in which we own a higher working interest.

Depreciation and Depletion Expense.  Depreciation and depletion expense was $147,311 and $449,120 for the quarters ended September 30, 2008 and 2007, respectively, and $913,214 and $1,115,877 for the nine months ended September 30, 2008 and 2007, respectively.  The decrease for both the quarter and nine months is due to the sale of our interest in the Caracara prospect, partially offset by a 71.58% increase in the depletable cost pool attributable to drilling results on prospects in which we hold a higher working interest (12.5%).

General and Administrative Expenses.  General and administrative expense increased by 48.4% to $609,398 during the quarter ended September 30, 2008 from $410,752 in the 2007 quarter.  For the nine months ended September 30, 2008, general and administrative expenses increased 103.6%, to $2,616,714, compared to the 2007 nine month period.  The increase in general and administrative expense was primarily attributable to increases, during the second quarter, in compensation expense relating to one time restricted stock grants ($400,320) and cash bonuses payable on closing of the Caracara sale ($750,000).

Gain on sale of oil & gas properties. The sale of our Caracara assets resulted in a gain of $7,615,236 during the quarter and nine months ended September 30, 2008.  The gain realized may be subject to adjustment based on post-closing adjustments.

Other Income.  Other income consists of interest earned on cash balances and marketable securities.

Interest income decreased 49.8% from $144,209 during the quarter ended September 30, 2007 to $72,427 during the quarter ended September 30, 2008 and decreased 53.9% from $504,763 during the nine months ended September 30, 2007 to $232,870 during the nine months ended September 30, 2008.  The decrease in interest income was attributable to reduced interest rates on short term cash investments.

Income Tax Expense.  Income tax expense increased to $76,703 during the 2008 quarter compared to a tax benefit of $366,891 during the 2007 quarter.  For the nine months ended September 30, 2008, income tax expense increased to $5,130,141, as compared to a tax benefit of $261,466 during the 2007 period. The increase in income tax expense during the 2008 quarter was attributable to the increase in revenue and profitability of operations in Colombia and the increase during the nine month period was attributable to the sale of the Caracara assets and, to a lesser extent, the increase in revenue and profitability of operations in Colombia.  Income tax expense during the 2008 and 2007 periods was entirely attributable to operations in Colombia.  The Company recorded no U.S. income tax liability in the 2008 or 2007 periods.

15

Financial Condition

Liquidity and Capital Resources.  At September 30, 2008, we had a cash balance of $11,853,248 and working capital of $13,730,046 compared to a cash balance of $417,818 and working capital of $10,358,502 at December 31, 2007. The increase in working capital during the period was primarily attributable to the receipt of proceeds from the sale of the Caracara assets and, to a lesser extent, increased revenues from wells producing in Colombia.

Operations used cash during the 2008 period totaled $895,248 as compared to $1,049,835 of cash provided by operations during the 2007 period.  The adverse change in operating cash flows was attributable to taxes arising from the sale of the Caracara assets ($4,394,575) and the payment of cash bonuses ($750,000) during the 2008 period.

Investing activities provided $12,517,693 during the 2008 period compared to $510,318 used during the 2007 period.  The funds provided by investing activities reflect the receipt of proceeds from the sale of the Caracara assets ($9,872,959) and the Home Run and North Henry Bayou prospects ($273,696), as well as the sale of marketable securities $9,650,000 during the 2008 period and the sale of marketable securities $4,150,000 during the 2007 period.  Funds used in investing activities consisted primarily of investments in oil and gas properties and assets of ($7,180,675) during the 2008 period and ($4,660,318) during the 2007 period.

Financing activities used $187,015 during the 2008 period, consisting of cash dividends paid in the amount of $562,015, partially offset by the receipt of $375,000 from the exercise of outstanding warrants.  We had no financing activities during the 2007 period.

Capital and Exploration Expenditures and Commitments.  Our principal capital and exploration expenditures relate to ongoing efforts to acquire, drill and complete prospects.  We expect that future capital and exploration expenditures will be funded principally through funds generated from operations and funds on hand, including funds generated from the sale of our interest in the Caracara prospect.

During the nine months of 2008, we invested approximately $7,180,675 for the acquisition and development of oil and gas properties, consisting of (1) drilling of twelve wells in Colombia ($6,193,176), (2) seismic and geological costs in Colombia ($488,740), (3) delay rentals on U.S. properties ($33,458), (4) leasehold costs on U.S. properties ($6,475) and (5) capital expenditures on U.S. wells ($458,826).

At September 30, 2008, our only material contractual obligation requiring determinable future payments was a lease relating to the Company’s executive offices which was unchanged when compared to the 2007 Form 10-K.

At September 30, 2008, our acquisition and drilling budget for the balance of 2008 totaled approximately $3,000,000, which consisted of the drilling of eight wells in Colombia, two wells in the United States, and seismic and infrastructure cost.  Our acquisition and drilling budget has historically been subject to substantial fluctuation over the course of a year based upon successes and failures in drilling and completion of prospects and the identification of additional prospects during the course of a year.

Management anticipates that our current financial resources combined with expected operating cash flows will meet our anticipated objectives and business operations, including planned property acquisitions and drilling activities, for at least the next 12 months without the need for additional capital.  Management continues to evaluate producing property acquisitions as well as a number of drilling prospects.  It is possible, although not anticipated, that we may require and seek additional financing if additional drilling prospects are pursued beyond those presently under consideration.

Off-Balance Sheet Arrangements

We had no off-balance sheet arrangements or guarantees of third party obligations at September 30, 2008.

Inflation

We believe that inflation has not had a significant impact on operations since inception.

16


QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to a variety of risks, including commodity price risks associated with the price of oil and gas and interest rate risk associated with our investment of excess funds.  There have been no material changes in our commodity price risk management strategy and, therefore, the risk profile of our oil and gas operations remains substantially unchanged from the description in our Annual Report on Form 10-K for the year ended December 31, 2007.

Due to unfavorable market conditions for auction rate securities, during the first nine months of 2008, we liquidated all of our marketable securities at their face value and, at September 30, 2008, held no marketable securities. Accordingly, we are no longer exposed to the interest rate risk described in our Annual Report on Form 10-K for the year ended December 31, 2007.

CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Under the supervision and the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation as of September 30, 2008 of the effectiveness of the design and operation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended. Based on this evaluation, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were effective as of September 30, 2008.

Changes in Internal Control over Financial Reporting

Except as noted below, no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) occurred during the quarter ended September 30, 2008 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Weaknesses in internal control over financial reporting identified in our Form 10-K for the year ended December 31, 2007, related to (1) deficiencies in segregation of duties and (2) deficiencies in the treasury control process.

The deficiencies in segregation of duties arose from the fact that the company maintains a one person internal accounting staff that does not allow for the segregation of accounting, financial reporting and oversight functions.  The lack of segregation of duties in the accounting function has existed since the company’s inception and has been identified by management of the company as a weakness since inception.  As noted in our Form 10-K, we have taken no action to remedy the lack of segregation of duties and have no plans to take any such action because the size and scope of operations of our business do not, in management’s opinion, merit the addition of accounting and financial reporting staff.

The deficiency in the treasury control process arose from the occasional failure to review bank reconciliations prepared by a part-time consultant.  The deficiency was identified by our audit firm in connection with the audit of our 2007 financial statements.  We have since formalized our process of reviewing and approval of bank reconciliations.  As a result, we believe the deficiency in treasury control process has been remedied.  We incurred no material costs associated with remediation of the treasury control process deficiency.

17

PART II

RISK FACTORS

The following amendment and addition to the risk factors included under this Item 1A reflect the current conditions of the capital and energy markets, which present uncertainties to all companies that rely on capital markets for liquidity or financing or operate in the energy markets. The information in this Item 1A should be considered in conjunction with the other risk factors identified in Item 1A of our 2007 Annual Report on Form 10-K/A filed on October 3, 2008.

We May Be Affected by General Economic Conditions

The disruption experienced in U.S. and global credit markets during second half of 2008 has resulted in projected decreases in demand for oil and natural gas, resulting in a sharp drop in energy prices, and has affected the availability and cost of capital.  Prolonged negative changes in domestic and global economic conditions or disruptions of either or both of the financial and credit markets may have a material adverse effect on our results of operations, financial condition and liquidity.  At this time, it is unclear whether and to what extent the actions taken by the U.S. government, including, without limitation, the passage of the Emergency Economic Stabilization Act of 2008 and other measures currently being implemented or contemplated, will mitigate the effects of the crisis.  With respect to Houston American Energy, while we have no immediate need to access the credit markets in the foreseeable future, the impact of the current crisis on our ability to obtain financing in the future, if needed, and the cost and terms of same, is unclear.  From an operating standpoint, the current crisis has resulted in a steep decline in the price of oil and natural gas and will result in reduced revenues and reduced profitability and, if prices continue to decline, may result in deterioration of our financial position.

EXHIBITS

Exhibit
    
Number
  
Description
     
 
Certification of CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
     
 
Certification of CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
     
 
Certification of CEO Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
     
 
Certification of CFO Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on behalf by the undersigned thereunto duly authorized.

 
HOUSTON AMERICAN ENERGY CORP.
     
 
By:
/s/ John Terwilliger
   
John Terwilliger
   
CEO and President
     
 
By:
/s/ James J. Jacobs
   
James J. Jacobs
   
Chief Financial Officer

Date: November 12, 2008
 
 
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